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The Federal Reserve System (also known as the
Federal Reserve, and informally as the
Fed) is the central
banking system of the United States. It was created in 1913 by
the enactment of the Federal Reserve
Act, largely as a response to a series of financial panics or
bank runs, particularly a severe panic in
1907. Over time, the roles and responsibilities of the Federal
Reserve System have expanded and its structure has evolved. Events
such as the Great Depression were
some of the major factors leading to changes in the system. Its
duties today, according to official Federal Reserve documentation,
fall into four general areas:

Conducting the nation's monetary policy by influencing monetary
and credit conditions in the economy in pursuit of maximum
employment, stable prices, and moderate long-term interest
rates

Supervising and regulating banking institutions to ensure the
safety and soundness of the nation's banking and financial system,
and protect the credit rights of consumers

Maintaining stability of the financial system and containing
systemic risk that may arise in financial markets

Providing financial services to depository institutions, the
U.S. government, and foreign official institutions, including
playing a major role in operating the nation's payments system

Federal Reserve System is subject to the Administrative Procedure Act.
It is not "owned" by anyone and is "not a private, profit-making
institution". It describes itself as "an independent entity within
the government, having both public purposes and private aspects".
In particular, neither the Federal Reserve System nor its component
banks are owned by the US Federal Government.

According to the Federal Reserve, there are presently five
different parts of the Federal Reserve System:

The presidentially appointed Board of
Governors of the Federal Reserve System, a governmental
agency in Washington, D.C.

The Federal Open Market Committee (FOMC),
which oversees Open Market Operations, the principal tool of
national monetary policy.

Twelve regional privately-owned Federal Reserve
Banks located in major cities throughout the nation, which
divide the nation into 12 districts, acting as fiscal agents for
the U.S. Treasury, each with its own nine-member board of
directors.

Numerous other private U.S. member banks,
which subscribe to required amounts of non-transferable stock in
their regional Federal Reserve Banks.

Various advisory councils.

The structure of the central banking system in the United States is
unique compared to others' in the world, in that an entity outside
of the central bank creates the currency. This other entity is
the United States Department of the
Treasury.

History

Central banking in the United States

In early 1781 the Articles of Confederation & Perpetual Union
were ratified so that Congress had the power to emit bills
of credit. It passed later that year an ordinance to
incorporate a privately subscribed national bank following in the
footsteps of the Bank of
England. However, it was thwarted in fulfilling its
intended role as a nationwide central bank due to objections of
"alarming foreign influence and fictitious credit," favoritism to
foreigners and unfair competition against less corrupt state banks
issuing their own notes,
such that Pennsylvania's legislature repealed its charter to operate within the Commonwealth in
1785.

Four years
after the U.S. constitution was ratified, the government adopted
another central bank, the First Bank of
the United States, but it would ultimately be shut down by President Madison.The Second Bank of
the United States, i.e. the second central bank, met a similar fate
when its charter expired under President
Jackson. Both banks were, again, based upon the Bank of
England, but the increased Federal power, due to the constitution,
gave them more control over currency. Political opposition to
central banking was the primary reason for shutting down the banks,
but there was also a considerable amount of corruption in the
second central bank. Ultimately, the third national bank was
established in 1913 and still exists to this day. The time line of
central banking in the United States is as follows:

In 1816,
however, Madison revived it in the form of the Second Bank of
the United States. Early renewal of the bank's charter became
the primary issue in the reelection of President Andrew Jackson. After Jackson, who was
opposed to the central bank, was reelected, he pulled the
government's funds out of the bank. Nicholas Biddle, President of the
Second Bank of the United States, responded by contracting the
money supply to pressure Jackson to renew the bank's charter
forcing the country into a recession, which the bank blamed on
Jackson's policies. Interestingly, Jackson is the only President to
completely pay off the national debt. The bank's charter was not
renewed in 1836. From 1837 to 1862, in the Free Banking Era there was no formal
central bank. From 1862 to 1913, a system of national banks was
instituted by the 1863 National
Banking Act. A series of bank panics, in 1873, 1893, and 1907,
provided strong demand for the creation of a centralized banking
system.

Creation of Third Central Bank

The main motivation for the third central banking system came from
the Panic of 1907, which renewed
demands for banking and currency reform. During the last quarter of
the 19th century and the beginning of the 20th century the United
States economy went through a series of financial panics. According to proponents
of the Federal Reserve System and many economists, the previous
national banking system had two main weaknesses: an "inelastic"
currency, and a lack of liquidity. The following year Congress
enacted the Aldrich-Vreeland
Act, which provided for an emergency currency and established
the National Monetary
Commission to study banking and currency reform. The American
public believed that the Federal Reserve System would bring about
financial stability, so that a panic like the one in 1907 could
never happen again; but just 22 years later in 1929, the stock market crashed again, and
the United States entered the worst depression in its history, the
Great Depression. Some economists
including Milton Friedman, Ben Bernanke, Robert Latham Owen and Murray Rothbard believe that the Federal
Reserve System helped to cause the Great Depression.

Federal Reserve Act

Newspaper clipping, December 24,
1913

The chief of the bipartisan National Monetary Commission was
financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two
commissions—one to study the American monetary system in depth and
the other, headed by Aldrich himself, to study the European
central-banking systems and report on them. Aldrich went to Europe
opposed to centralized banking, but after viewing Germany's
monetary system he came away believing that a centralized bank was
better than the government-issued bond system that he had
previously supported.

Centralized banking was met with much opposition from politicians,
who were suspicious of a central bank and who charged that Aldrich
was biased due to his close ties to wealthy bankers such as
J.P.Morgan
and his daughter's marriage to John D.Rockefeller, Jr. Aldrich fought for
a private bank with little government influence, but conceded that
the government should be represented on the Board of Directors.
Most Republicans
favored the Aldrich Plan, but it lacked enough support in the
bipartisan Congress to pass because rural and western states viewed
it as favoring the "eastern establishment". Progressive Democrats
instead favored a reserve system owned and operated by the
government and out of control of the "money trust," ending Wall
Street's control of the American currency supply. Conservative
Democrats fought for a privately owned, yet decentralized, reserve
system, which would still be free of Wall Street's control. The
Federal Reserve Act passed Congress in late 1913 on a mostly
partisan basis, with most all Democrats in support and most
Republicans against it. The plan that was adopted as the Federal
Reserve Act had similarities to the Aldrich plan, but the balance
of public and private control was modified.

1944-1971: Bretton Woods Era

In July
1944, 730 delegates from all 44 Allied nations gathered at the
Mount Washington
Hotel in Bretton Woods, New Hampshire, United
States, to build a new international monetary system,
which was in serious threat due to damage incurred during the Great
Depression and the mounting debt of the Second World War.
Their main objective was the cultivation of trade, which relied on
the easy convertibility of
currencies. Negotiators at the Bretton Woods conference, fresh from
what they perceived as a disastrous experience with floating rates
in the 1930s, concluded that major monetary fluctuations could
stall the free flow of trade. Planners fundamentally supported a
capitalistic approach, but favored tight
control on currency values.

In the face of increasing financial strain, however, the Bretton
Woods system collapsed in 1971, after the United States unilaterallyterminatedconvertibility of the dollars to gold. This action caused
considerable financial stress in the world economy and created the
unique situation whereby the United States dollar became the
"reserve currency" in the states
that had signed the agreement.

1971-Present: Dollar Reserve Standard

Under the dollar reserve standard, the U.S. dollar was the most
favored currency for nations of the world to use as reserves, which
continued as a trend for over 30 years. At the beginning of the
dollar reserve standard, the 1970s became a period of high
inflation. As a result, in July 1979 Paul
Volcker was nominated by President
Carter as Chairman of the Federal Reserve Board. He tightened
the money supply, and by 1986 inflation had fallen sharply. In
October 1979 the Federal Reserve announced a policy of "targeting"
money aggregates and bank reserves in
its struggle with double-digit inflation.

In January 1987, with retail inflation at only 1%, the Federal
Reserve announced it was no longer going to use money-supply
aggregates, such as M2, as guidelines for
controlling inflation, even though this method had been in use from
1979, apparently with great success. Before 1980, interest rates
were used as guidelines; inflation was severe. The Fed complained
that the aggregates were confusing. Volcker was chairman until
August 1987, whereupon Alan Greenspan
assumed the mantle, seven months after monetary aggregate policy
had changed.

Purpose

The primary motivation for creating the Federal Reserve System was
to address banking panics. Other purposes
are stated in the Federal Reserve
Act, such as "to furnish an elastic currency, to afford means
of rediscounting commercial paper, to establish a more effective
supervision of banking in the United States, and for other
purposes." Before the founding of the Federal Reserve, the United
States underwent several financial crises. A particularly severe
crisis in 1907 led Congress to enact the Federal Reserve Act in
1913. Today the Fed has broader responsibilities than only ensuring
the stability of the financial system.

To maintain the stability of the financial system and contain
systemic risk in financial
markets

To provide financial services to depository institutions, the
U.S. government, and foreign official institutions, including
playing a major role in operating the nation’s payments system

To facilitate the exchange of payments among regions

To respond to local liquidity needs

To strengthen U.S. standing in the world economy

Addressing the problem of bank panics

Bank runs occur because banking institutions in the United States
are only required to hold a fraction of their depositors' money in
reserve. This practice is called fractional-reserve banking. As a
result, most banks invest the majority of their depositors money.
On rare occasion, too many of the bank's customers will withdraw
their savings and the bank will need help from another institution
to continue operating. Bank runs can lead to a multitude of social
and economic problems. The Federal Reserve was designed as an
attempt to prevent or minimize the occurrence of bank runs, and
possibly act as a lender of last resort if a bank run does occur.
Many economists, following Milton
Friedman, believe that the Federal Reserve inappropriately
refused to lend money to small banks during the bank runs of
1929.

Elastic currency

One way to prevent bank runs is to have a money supply that can
expand when money is needed. The term "elastic currency" in the
Federal Reserve Act does not just mean the ability to expand the
money supply, but also to contract it. Some economic theories have
been developed that support the idea of expanding or shrinking a
money supply as economic conditions warrant. Elastic
currency is defined by the Federal Reserve as:

Monetary policy of the Federal Reserve System is based partially on
the theory that it is best overall to expand or contract the money
supply as economic conditions change.

Check Clearing System

Because some banks refused to clear checks from certain others
during times of economic uncertainty, a check-clearing system was
created in the Federal Reserve system. It is briefly described in
The Federal Reserve System—Purposes and Functions as
follows:

Lender of last resort

Emergencies

The Federal Reserve has the authority to act as “lender of last
resort” by extending credit to depository institutions or to other
entities in unusual circumstances involving a national or regional
emergency, where failure to obtain credit would have a severe
adverse impact on the economy.

Fluctuations

Through its discount and credit operations, Reserve Banks provide
liquidity to banks to meet short-term needs stemming from seasonal
fluctuations in deposits or unexpected withdrawals. Longer term
liquidity may also be provided in exceptional circumstances. The
rate the Fed charges banks for these loans is the discount rate (officially the primary credit
rate).

By making these loans, the Fed serves as a buffer against
unexpected day-to-day fluctuations in reserve demand and supply.
This contributes to the effective functioning of the banking
system, alleviates pressure in the reserves market and reduces the
extent of unexpected movements in the interest rates. For example,
on September 16, 2008, the Federal Reserve Board authorized an $85
billion loan to stave off the bankruptcy of international insurance
giant American
International Group (AIG). The Federal Reserve System's role as
lender of last resort is criticized for shifting risk and
responsibility away from lenders and borrowers and placing them on
others in the form of taxes and/or inflation.

Central bank

In its role as the central bank of the
United States, the Fed serves as a banker's bank
and as the government's bank. As the banker's
bank, it helps to assure the safety and efficiency of the payments
system. As the government's bank, or fiscal agent, the Fed
processes a variety of financial transactions involving trillions
of dollars. Just as an individual might keep an account
at a bank, the U.S.Treasury keeps a checking account with the Federal Reserve,
through which incoming federal tax deposits and outgoing government
payments are handled. As part of this service relationship,
the Fed sells and redeems U.S.
government securities such as savings bonds and Treasury bills,
notes and bonds. It also issues the nation's coin and paper currency.
The U.S. Treasury, through its Bureau
of the Mint and Bureau of Engraving and
Printing, actually produces the nation's cash supply and, in
effect, sells it to the Federal Reserve Banks at manufacturing
cost, currently about 4 cents per bill for paper currency. The
Federal Reserve Banks then distribute it to other financial
institutions in various ways.

Federal funds

Federal funds are the reserve balances that private banks keep at
their local Federal Reserve Bank. These balances are the namesake
reserves of the Federal Reserve System. The purpose of keeping
funds at a Federal Reserve Bank is to have a mechanism for private
banks to lend funds to one another. This market for funds plays an
important role in the Federal Reserve System as it is what inspired
the name of the system and it is what is used as the basis for
monetary policy. Monetary policy works by influencing how much
money the private banks charge each other for the lending of these
funds.

Balance between private banks and responsibility of
governments

The system was designed out of a compromise between the competing
philosophies of privatization and government regulation. In 2006
Donald L.Kohn, vice chairman of the Board of
Governors, summarized the history of this compromise:

In the current system, private banks are for-profit businesses but
government regulation places restrictions on what they can do. The
Federal Reserve System is a part of government that regulates the
private banks. The balance between privatization and government
involvement is also seen in the structure of the system. Private
banks elect members of the board of directors at their regional
Federal Reserve Bank while the members of the Board of Governors
are selected by the President of the United
States and confirmed by the Senate. The private banks give input to
the government officials about their economic situation and these
government officials use this input in Federal Reserve policy
decisions. In the end, private banking businesses are able to run a
profitable business while the U.S. government, through the Federal
Reserve System, oversees and regulates the activities of the
private banks.

Government regulation and supervision

The Board of Governors in the Federal Reserve
System has a number of supervisory and regulatory responsibilities
in the U.S. banking system, but not complete responsibility. A
general description of the types of regulation and supervision
involved in the U.S. banking system is given by the Federal
Reserve:

Preventing asset bubbles

The board of directors of each Federal Reserve Bank District also
have regulatory and supervisory responsibilities. For example, a
member bank (private bank) is not permitted to give out too many
loans to people who cannot pay them back. This is because too many
defaults on loans will lead to a bank run. If the board of
directors has judged that a member bank is performing or behaving
poorly, it will report this to the Board of Governors. This policy
is described in United States Code:

These aspects of the Federal Reserve System are the parts intended
to prevent or minimize speculative asset bubbles, which ultimately
lead to severe market corrections. The recent bubbles and
corrections in energies, grains, equity and debt products and real
estate cast doubt on the efficacy of these controls.

National payments system

The Federal Reserve plays an important role in the U.S. payments system. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities.

In passing the Depository
Institutions Deregulation and Monetary Control Act of 1980,
Congress reaffirmed its intention that the Federal Reserve should
promote an efficient nationwide payments system. The act subjects
all depository institutions, not just member commercial banks, to
reserve requirements and grants them equal access to Reserve Bank
payment services. It also encourages competition between the
Reserve Banks and private-sector providers of payment services by
requiring the Reserve Banks to charge fees for certain payments
services listed in the act and to recover the costs of providing
these services over the long run.

The Federal Reserve plays a vital role in both the nation’s
retail and wholesale payments
systems, providing a variety of financial services to
depository institutions. Retail payments are generally for
relatively small-dollar amounts and often involve a depository
institution’s retail clients—individuals and smaller businesses.
The Reserve Banks’ retail services include distributing currency
and coin, collecting checks, and electronically transferring funds
through the automated clearinghouse system. By contrast, wholesale
payments are generally for large-dollar amounts and often involve a
depository institution’s large corporate customers or
counterparties, including other financial institutions. The Reserve
Banks’ wholesale services include electronically transferring funds
through the Fedwire Funds
Service and transferring securities issued by the U.S.
government, its agencies, and certain other entities through the
Fedwire Securities Service. Because of the large amounts of funds
that move through the Reserve Banks every day, the System has
policies and procedures to limit the risk to the Reserve Banks from
a depository institution’s failure to make or settle its
payments.

The Federal Reserve Banks began a multi-year restructuring of their
check operations in 2003 as part of a long-term strategy to respond
to the declining use of checks by consumers and businesses and the
greater use of electronics in check processing. The Reserve Banks
will have reduced the number of full-service check processing
locations from 45 in 2003 to 4 by early 2011.

Structure

Independent within government

Central bank independence versus
inflation.

This often cited research published by Alesina and Summers
(1993) is used to show why it is important for a nation's central
bank (i.e.-monetary authority) to have a high level of
independence.

This chart shows a clear trend towards a lower inflation rate
as the independence of the central bank increases.

The generally agreed upon reason independence leads to lower
inflation is that politicians have a tendency to create too much
money if given the opportunity to do it.

The Federal Reserve System in the United States is generally
regarded as one of the more independent central banks.

The Federal Reserve System is an independent government institution
that has private aspects. The System is not a private organization
and does not operate for the purpose of making a profit. The stocks
of the regional federal reserve banks are owned by the banks
operating within that region and which are part of the system. The
System derives its authority and public purpose from the Federal Reserve Act passed by Congress
in 1913. As an independent institution, the Federal Reserve System
has the authority to act on its own without prior approval from
Congress or the President. The members of its Board of Governors
are appointed for long, staggered terms, limiting the influence of
day-to-day political considerations. The Federal Reserve System's
unique structure also provides internal checks and balances,
ensuring that its decisions and operations are not dominated by any
one part of the system. It also generates revenue independently
without need for Congressional funding. Congressional oversight and
statutes, which can alter the Fed's responsibilities and control,
allow the government to keep the Federal Reserve System in check.
Since the System was designed to be independent whilst also
remaining within the government of the United States, it is often
said to be "independent within the government."

The twelve Federal Reserve banks provide the financial means to
operate the Federal Reserve System. Each reserve bank is organized
much like a private corporation so that it can provide the
necessary revenue to cover operational expenses and implement the
demands of the board. Member banks are privately owned banks that
must buy a certain amount of stock in the Reserve Bank within its
region to be a member of the Federal Reserve System. This stock
"may not be sold, traded, or pledged as security for a loan" and
all member banks receive a 6% annual dividend. No stock in any
Federal Reserve Bank has ever been sold to the public, to
foreigners, or to any non-bank U.S. firm. These member banks must
maintain fractional
reserves either as vault currency or on account at its Reserve
Bank; member banks earn no interest on either of these. The
dividends paid by the Federal Reserve Banks to member banks are
considered partial compensation for the lack of interest paid on
the required reserves. All profit after expenses is returned to the
U.S. Treasury or contributed to the surplus capital of the Federal
Reserve Banks (and since shares in ownership of the Federal Reserve
Banks are redeemable only at par, the nominal "owners" do not
benefit from this surplus capital); the Federal Reserve system
contributed over $31.7 billion to the Treasury in 2008.

Decisions seek to foster economic growth with price stability
by influencing the flow of money and credit

Composed of the 7 members of the Board of Governors and the
Reserve Bank presidents, 5 of whom serve as voting members on a
rotating basis

Federal Reserve Banks;

12 regional banks with 25 branches

Each independently incorporated with a 9-member board of
directors, with 6 of them elected by the member banks while the
remaining 3 are designated by the Board of Governors.

Set discount rate, subject to approval by Board of
Governors.

Monitor economy and financial institutions in their districts
and provide financial services to the U.S. government and
depository institutions.

Member banks

Private banks

Hold stock in their local Federal Reserve Bank

Elect six of the nine members of Reserve Banks’ boards of
directors.

Advisory Committees

Carry out varied responsibilities

Board of Governors

The seven-member Board of Governors is the main governing body of
the Federal Reserve System. It is charged with overseeing the 12
District Reserve Banks and with helping implement national monetary
policy. Governors are appointed by the President of the United
States and confirmed by the Senate for staggered, 14-year terms. By
law, the appointments must yield a "fair representation of the
financial, agricultural, industrial, and commercial interests and
geographical divisions of the country," and as stipulated in the
Banking Act of 1935, the Chairman and Vice Chairman of the Board
are two of seven members of the Board of Governors who are
appointed by the President from among the
sitting Governors.See As an independent
federal government agency, the Board of Governors does not
receive funding from Congress, and the terms of the seven members
of the Board span multiple presidential and congressional terms.
Once a member of the Board of Governors is appointed by the
president, he or she functions mostly independently. The Board is
required to make an annual report of operations to the Speaker of
the U.S. House of Representatives. It also supervises and regulates
the operations of the Federal Reserve Banks, and the US banking
system in general.

Membership is generally limited to one term. However, if someone is
appointed to serve the remainder of another member's uncompleted
term, he or she may be reappointed to serve an additional 14-year
term. Conversely, a governor may serve the remainder of another
governor's term even after he or she has completed a full term. The
law provides for the removal of a member of the Board by the
President "for cause".See .

Federal Open Market Committee

Modern-day meeting of the Federal Open
Market Committee at the Eccles Building, Washington, D.C.

The Federal Open Market
Committee (FOMC) created under comprises the seven members of
the board of governors and five representatives selected from the
regional Federal Reserve Banks. The FOMC is charged under law with
overseeing open market
operations, the principal tool of national monetary policy.
These operations affect the amount of Federal Reserve balances
available to depository institutions, thereby influencing overall
monetary and credit conditions. The FOMC also directs operations
undertaken by the Federal Reserve in foreign exchange markets. The
representative from the Second District, New York, is a permanent
member, while the rest of the banks rotate at two- and three-year
intervals. All the presidents participate in FOMC discussions,
contributing to the committee’s assessment of the economy and of
policy options, but only the five presidents who are committee
members vote on policy decisions. The FOMC, under law, determines
its own internal organization and by tradition elects the Chairman
of the Board of Governors as its chairman and the president of the
Federal Reserve Bank of New York as its vice chairman. Formal
meetings typically are held eight times each year in Washington,
D.C. Nonvoting Reserve Bank presidents also participate in
Committee deliberations and discussion. The FOMC generally meets
eight times a year in Telephone consultations and other meetings
are held when needed.

Federal Reserve Banks

Federal Reserve Districts

There are 12 regional Federal Reserve Banks (not
to be confused with the "member banks") with 25
branches, which serve as the operating arms of the system.
Each Federal Reserve Bank is subject to oversight by the Board of
Governors. Each Federal Reserve Bank has a board of
directors, whose members work closely with their Reserve
Bank president to provide grassroots economic information and input
on management and monetary policy decisions. These boards are drawn
from the general public and the banking community and oversee the
activities of the organization. They also appoint the presidents of
the Reserve Banks, subject to the approval of the Board of
Governors. Reserve Bank boards consist of nine members: six serving
as representatives of nonbanking enterprises and the public
(nonbankers) and three as representatives of banking. Each Federal
Reserve branch office has its own board of directors, composed of
three to seven members, that provides vital information concerning
the regional economy.

Total assets of each Federal Reserve
Bank from 1996-2009 (Millions of Dollars).

The Reserve Banks opened for business on November 16, 1914.
Federal Reserve Notes were
created as part of the legislation to provide a supply of currency.
The notes were to be issued to the Reserve Banks for subsequent
transmittal to banking institutions. The various components of the
Federal Reserve System have differing legal statuses.

Legal status

The Federal Reserve Banks have an intermediate legal status, with
some features of private corporations and some
features of public federal agencies. Each member
bank owns nonnegotiable shares of stock in its regional Federal
Reserve Bank. However, holding Fed stock is not like owning
publicly traded stock. Fed stock cannot be sold or traded, and they
do not control the Fed as a result of owning this stock. They do,
however, elect six of the nine members of Reserve Banks’ boards of
directors. Furthermore, the charter of each Federal Reserve Bank is
established by law and cannot be altered by the member banks. In
Lewis v.United States, the United
States Court of Appeals for the Ninth Circuit stated
that:

The opinion also stated that:

Another decision is Scott v.Federal Reserve Bank of
Kansas City, in which the distinction between the Federal
Reserve Banks and the Board of Governors is made.

Board of Directors

The nine member board of directors of each district is made up of 3
classes, designated as classes A, B, and C. The
directors serve a term of 3 years. The makeup of the boards of
directors is outlined in U.S. Code, Title 12, Chapter 3, Subchapter
7:

Class A

three members

chosen by and representative of the stockholding banks.

member banks are divided into 3 groups based on size—large,
medium, and small banks. Each group elects one member of Class
A.

Class B

three members

No director of class B shall be an officer, director, or
employee of any bank

represent the public with due but not exclusive consideration
to the interests of agriculture, commerce, industry, services,
labor, and consumers.

member banks are divided into 3 groups based on size—large,
medium, and small banks. Each group elects one member of Class
B.

Class C

three members

No director of class C shall be an officer, director, employee,
or stockholder of any bank

designated by the Board of Governors of the Federal Reserve
System. They shall be elected to represent the public, and with due
but not exclusive consideration to the interests of agriculture,
commerce, industry, services, labor, and consumers.

Shall have been for at least two years residents of the
district for which they are appointed, one of whom shall be
designated by said board as chairman of the board of
directors of the Federal reserve bank and as
Federal reserve agent.

A list of all of the members of the Reserve Banks' boards of
directors is published by the Federal Reserve.

President

The Federal Reserve Act provides that the president of a Federal
Reserve Bank shall be the chief executive officer of the Bank,
appointed by the board of directors of the Bank, with the approval
of the Board of Governors of the Federal Reserve System, for a term
of five years.

The terms of all the presidents of the twelve District Banks run
concurrently, ending on the last day of February of years numbered
6 and 1 (for example, 2001, 2006, and 2011). The appointment of a
president who takes office after a term has begun ends upon the
completion of that term. A president of a Reserve Bank may be
reappointed after serving a full term or an incomplete term.

Reserve Bank presidents are subject to mandatory retirement upon
becoming 65 years of age. However, presidents initially appointed
after age 55 can, at the option of the board of directors, be
permitted to serve until attaining ten years of service in the
office or age 70, whichever comes first.

List of Federal Reserve Banks

The Federal Reserve Districts are listed below along with their
identifying letter and number. These are used on Federal Reserve
Notes to identify the issuing bank for each note. The 25 branches
are also listed.

Primary Dealers

A
primary dealer is a bank or
securities broker-dealer that may
trade directly with the Federal Reserve System of the United States.They are required to make bids or offers
when the Fed conducts open market
operations, provide information to the Fed's open market
trading desk, and to participate actively in U.S.Treasury securities auctions.
They consult with both the U.S. Treasury and the Fed about funding
the budget deficit and implementing
monetary policy. Many former
employees of primary dealers work at the Treasury, because of their
expertise in the government debt markets, though the Fed avoids a
similar revolving door
policy.

Between them, these dealers purchase the vast majority of the U.S.
Treasury securities (T-bills,
T-notes, and T-bonds) sold at auction, and resell them to the
public. Their activities extend well beyond the Treasury market,
for example, according to the Wall Street Journal Europe (2/9/06
p. 20), all of the top ten dealers in the foreign exchange market are also
primary dealers, and between them account for almost 73% of forex
trading volume. Arguably, this group's members are the most
influential and powerful non-governmental institutions in world
financial markets.

The primary dealers form a worldwide network that distributes new
U.S. government debt. For example, Daiwa Securities and Mizuho
Securities distribute the debt to Japanese buyers. BNP Paribas,
Barclays, Deutsche Bank, and RBS
Greenwich Capital (a division of the Royal Bank of Scotland) distribute
the debt to European buyers. Goldman Sachs, and Citigroup account
for many American buyers. Nevertheless, most of these firms compete
internationally and in all major financial centers.

Member Banks

Each member bank is a private bank (e.g., a
privately owned corporation) that holds stock in one of the twelve
regional Federal Reserve banks. All of the commercial banks in the
United States can be divided into three types
according to which governmental body charters them and whether or
not they are members of the Federal Reserve System:

Type

Definition

national banks

Those chartered by the federal government (through the Office
of the Comptroller of the Currency in the Department of the
Treasury); by law, they are members of the Federal Reserve
System

state member banks

Those chartered by the states who are members of the Federal
Reserve System.

state nonmember banks

Those chartered by the states who are not members of the
Federal Reserve System.

All nationally chartered banks hold stock in one of the Federal
Reserve banks. State-chartered banks may choose to be members (and
hold stock in a regional Federal Reserve bank), upon meeting
certain standards.

Holding stock in a Federal Reserve bank is not, however, like
owning publicly traded stock. The stock cannot be sold or traded.
Member banks receive a fixed, 6 percent dividend annually on their
stock, and they do not directly control the applicable Federal
Reserve bank as a result of owning this stock. They do, however,
elect six of the nine members of Reserve banks’ boards of
directors. Federal statute provides (in part):

Other banks may elect to become member banks. According to the
Federal Reserve Bank of Boston:

For example, as of October 2006 the member banks in New Hampshire
included Community Guaranty Savings Bank; The Lancaster National
Bank; The Pemigewasset National Bank of Plymouth; and other banks.
In California, member banks (as of September 2006) included Bank of
America California, National Association; The Bank of New York
Trust Company, National Association; Barclays Global Investors,
National Association; and many other banks.

List of member banks

The majority of US banks are not members of the Federal Reserve
System.

While the OI, SA, and
SB categories are not members of the system, they
are sometimes treated as if they were members under certain
circumstances.

]]A list of all member banks can be found at the website of the
Federal Deposit
Insurance Corporation (FDIC). Most commercial banks in the
United States are not members of the Federal Reserve System, but
the total value of all the banking assets of member banks is
substantially larger than the total value of the banking assets of
nonmembers.

Advisory Committees

The Federal Reserve System uses advisory committees in carrying out
its varied responsibilities. Three of these committees advise the
Board of Governors directly:

Of these advisory committees, perhaps the most important are the
committees (one for each Reserve Bank) that advise the Banks on
matters of agriculture, small business, and labor. Biannually, the
Board solicits the views of each of these committees by mail.

Monetary policy

The term "monetary policy" refers to
the actions undertaken by a central bank, such as the Federal
Reserve, to influence the availability and cost of money and credit
to help promote national economic goals. What happens to money and
credit affects interest rates (the cost of credit) and the
performance of the U.S. economy. The Federal Reserve Act of 1913
gave the Federal Reserve responsibility for setting monetary
policy.

Interbank lending is the basis of policy

The Federal Reserve implements monetary policy by influencing the
interbank lending of excess
reserves. The rate that banks charge each other for these loans
is determined by the markets but the Federal Reserve influences
this rate through the three tools of monetary policy described in
the "Tools" section below. This is a short-term interest rate the
FOMC focuses on directly. This rate ultimately effects the
longer-term interest rates throughout the economy. A summary of the
basis and implementation of monetary policy is stated by the
Federal Reserve:

This influences the economy through its effect on the quantity of
reserves that banks use to make loans. Policy actions that add
reserves to the banking system encourage lending at lower interest
rates thus stimulating growth in money, credit, and the economy.
Policy actions that absorb reserves work in the opposite direction.
The Fed's task is to supply enough reserves to support an adequate
amount of money and credit, avoiding the excesses that result in
inflation and the shortages that stifle economic growth.

Goals

The goals of monetary policy include:

maximum employment

stable prices

moderate long-term interest rates

promotion of sustainable economic growth

Tools

There are three main tools of monetary policy that the Federal
Reserve uses to influence the amount of reserves in private
banks:

purchases and sales of U.S. Treasury and federal agency
securities—the Federal Reserve's principal tool for implementing
monetary policy. The Federal Reserve's objective for open market
operations has varied over the years. During the 1980s, the focus
gradually shifted toward attaining a specified level of the
federal funds rate (the rate that
banks charge each other for overnight loans of federal funds, which
are the reserves held by banks at the Fed), a process that was
largely complete by the end of the decade.

the amount of funds that a depository institution must hold in
reserve against specified deposit liabilities.

Open market operations

Open market operations put money in and take money out of the
banking system. This is done through the sale and purchase of U.S.
government treasury securities. When the U.S. government sells
securities, it gets money from the banks and the banks get a piece
of paper (I.O.U.) that says the U.S. government owes the bank
money. This drains money from the banks. When the U.S. government
buys securities, it gives money to the banks and the banks give the
I.O.U. back to the U.S. government. This puts money back into the
banks. The Federal Reserve education website describes open market
operations as follows:

A simpler description is described in The Federal Reserve in
Plain English:

Repurchase agreements

To smooth temporary or cyclical changes in the monetary supply, the
desk engages in repurchase
agreements (repos) with its primary dealers. Repos are
essentially secured, short-term lending by the Fed. On the day of
the transaction, the Fed deposits money in a primary dealer’s reserve account, and
receives the promised securities as collateral. When the transaction
matures, the process unwinds: the Fed returns the collateral and
charges the primary dealer’s reserve
account for the principal and accrued interest. The term of the
repo (the time between settlement and maturity) can vary from 1 day
(called an overnight repo) to 65 days.

Federal funds rate and discount rate

The effective federal funds rate
charted over fifty years.

The Federal Reserve System implements monetary policy largely by targeting the
federal funds rate. This is the
rate that banks charge each other for overnight loans of federal funds, which are the reserves held by
banks at the Fed. This rate is actually determined by the market
and is not explicitly mandated by the Fed. The Fed therefore tries
to align the effective federal funds rate with the targeted rate by
adding or subtracting from the money supply through open market
operations. The late economist Milton
Friedman consistently criticized this reverse method of
controlling inflation by seeking an ideal interest rate and
enforcing it through affecting the money supply since nowhere in
the widely accepted money supply
equation are interest rates found.

The Federal Reserve System also directly sets the "discount rate",
which is the interest rate for "discount window lending", overnight
loans that member banks borrow directly from the Fed. This rate is
generally set at a rate close to 100 basis
points above the target federal funds rate. The idea is to
encourage banks to seek alternative funding before using the
"discount rate" option. The equivalent operation by the European
Central Bank is referred to as the "marginal lending
facility."

Both of these rates influence the prime
rate, which is usually about 3 percent higher than the federal
funds rate.

Lower interest rates stimulate economic activity by lowering the
cost of borrowing, making it easier for consumers and businesses to
buy and build, but at the cost of promoting the expansion of the
money supply and thus greater inflation. Higher interest rates may
slow the economy by increasing the cost of borrowing. (See monetary policy for a fuller
explanation.)

The Federal Reserve System usually adjusts the federal funds rate
by 0.25% or 0.50% at a time.

The Federal Reserve System might also attempt to use open market operations to change
long-term interest rates, but its "buying power" on the market is
significantly smaller than that of private institutions. The Fed
can also attempt to "jawbone" the markets into moving towards the
Fed's desired rates, but this is not always effective.

Reserve requirements

Another instrument of monetary policy adjustment employed by the
Federal Reserve System is the fractional reserve requirement, also known as the
required reserve ratio. The required reserve ratio sets the balance
that the Federal Reserve System requires a depository institution
to hold in the Federal Reserve Banks,, which depository
institutions trade in the federal funds market discussed above. The
required reserve ratio is set by the Board of Governors of the
Federal Reserve System. The reserve requirements have changed over
a time and some of the history of these changes is published by the
Federal Reserve.

Reserve Requirements in the U.S. Federal Reserve System

Type
of liability

Requirement

Percentage of liabilities

Effective date

Net transaction
accounts

$0 to $10.3 million

0

01/01/09

More than $10.3 million to $44.4
million

3

01/01/09

More than $44.4 million

10

01/01/09

Nonpersonal time deposits

0

12/27/90

Eurocurrency liabilities

0

12/27/90

NOTE: As a response to the financial crisis of 2008, the Federal
Reserve now makes interest payments on depository institutions'
required and excess reserve balances. The payment of interest on
excess reserves gives the central bank greater opportunity to
address credit market conditions while maintaining the federal
funds rate close to the target rate set by the FOMC.

New facilities

In order to address problems related to the subprime mortgage crisis and
United States housing
bubble, several new tools have been created. The first new
tool, called the Term Auction
Facility, was added on December 12, 2007. It was first
announced as a temporary tool but there have been suggestions that
this new tool may remain in place for a prolonged period of time.
Creation of the second new tool, called the Term Securities Lending
Facility, was announced on March 11, 2008. The main
difference between these two facilities is that the Term Auction
Facility is used to inject cash into the banking system whereas the
Term Securities Lending Facility is used to inject treasury securities into the banking
system. Creation of the third tool, called the Primary Dealer Credit
Facility (PDCF), was announced on March 16, 2008. The PDCF
was a fundamental change in Federal Reserve policy because now the
Fed is able to lend directly to primary
dealers, which was previously against Fed policy. The
differences between these 3 new facilities is described by the
Federal Reserve:

Some of the measures taken by the Federal Reserve to address this
mortgage crisis haven't been used since The Great Depression. The Federal
Reserve gives a brief summary of what these new facilities are all
about:

Term auction facility

The Term Auction Facility is a program in which the Federal Reserve
auctions term funds to depository institutions. The creation of this
facility was announced by the Federal Reserve on December 12, 2007
and was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss
National Bank to address elevated pressures in short-term
funding markets. The reason it was created is because banks
were not lending funds to one another and banks in need of funds
were refusing to go to the discount window. Banks were not lending
money to each other because there was a fear that the loans would
not be paid back. Banks refused to go to the discount window
because it is usually associated with the stigma of bank failure.
Under the Term Auction Facility, the identity of the banks in need
of funds is protected in order to avoid the stigma of bank failure.
Foreign
exchange swap lines with the European Central Bank and Swiss National
Bank were opened so the banks in Europe could have access to
U.S. dollars. Federal Reserve
Chairman Ben Bernanke briefly described this facility to the U.S.
House of Representatives on January 17, 2008:

It is also described in the Term Auction Facility
FAQ

Term securities lending facility

The Term Securities Lending Facility is a 28-day facility that will
offer Treasury general collateral to the Federal Reserve Bank of
New York’s primary dealers in exchange for other program-eligible
collateral. It is intended to promote liquidity in the financing
markets for Treasury and other collateral and thus to foster the
functioning of financial markets more generally. Like the Term Auction
Facility, the TSLF was done in conjunction with the Bank of
Canada, the Bank of England, the European Central Bank, and the Swiss
National Bank. The resource allows dealers to switch
debt that is less liquid for U.S. government securities that are
easily tradable. It is anticipated by Federal Reserve officials
that the primary dealers, which include Goldman Sachs Group. Inc.,
Bear Stearns Cos. and Merrill Lynch & Co., will lend the
Treasuries on to other firms in return for cash. That will help the
dealers finance their balance sheets. The currency swap
lines with the European Central Bank and Swiss National
Bank were increased.

Primary dealer credit facility

The Primary Dealer Credit Facility (PDCF) is an overnight loan
facility that will provide funding to primary dealers in exchange
for a specified range of eligible collateral and is intended to
foster the functioning of financial markets more generally. This
new facility marks a fundamental change in Federal Reserve policy
because now primary dealers can
borrow directly from the Fed when this previously was not
permitted.

Interest on reserves

, the Federal Reserve banks will pay interest on reserve balances (required & excess) held by depository institutions. The rate is set at the lowest federal funds rate during the reserve maintenance period of an institution, less 75bp. As of October 23, 2008, the Fed has lowered the spread to a mere 35 bp.

All U.S. depository institutions, bank holding companies (parent
companies or U.S. broker-dealer affiliates), or U.S. branches and
agencies of foreign banks are eligible to borrow under this
facility pursuant to the discretion of the FRBB.

Eligible Collateral:

Collateral eligible for pledge under the Facility must meet the
following criteria:

was purchased by Borrower on or after September 19, 2008 from a
registered investment company that holds itself out as a money
market mutual fund;

was purchased by Borrower at the Fund’s acquisition cost as
adjusted for amortization of premium or accretion of discount on
the ABCP through the date of its purchase by Borrower;

is rated at the time pledged to FRBB, not lower than A1, F1, or
P1 by at least two major rating agencies or, if rated by only one
major rating agency, the ABCP must have been rated within the top
rating category by that agency;

was issued by an entity organized under the laws of the United
States or a political subdivision thereof under a program that was
in existence on September 18, 2008; and

has a stated maturity that does not exceed 120 days if the
Borrower is a bank or 270 days for non-bank Borrowers.

Commercial Paper Funding Facility

The Commercial Paper
Funding Facility is also called the CPFF. On October 7, 2008
the Federal Reserve further expanded the collateral it will loan
against, to include commercial
paper. The action made the Fed a crucial source of credit for
non-financial businesses in addition to commercial banks and
investment firms. Fed officials said they'll buy as much of the
debt as necessary to get the market functioning again. They refused
to say how much that might be, but they noted that around $1.3
trillion worth of commercial paper would qualify. There was $1.61
trillion in outstanding commercial paper, seasonally adjusted, on
the market as of October 1, 2008, according to the most recent data
from the Fed. That was down from $1.70 trillion in the previous
week. Since the summer of 2007, the market has shrunk from more
than $2.2 trillion.

Money Market Investor Funding Facility

The Money Market Investor Funding Facility is also called the
MMIFF. The Federal Reserve introduced a facility on October 21,
2008, whereby money market
mutual funds can set up a structured investment vehicle
of short-term assets underwritten by the Federal Reserve Bank of
New York. The program will run until April 30, 2009, unless
extended by the FRB.

Quantitative policy

Another policy that can be used is a little used tool of the
Federal Reserve (US central bank) that is known as the quantitative
policy. With that the Federal Reserve actually buys back corporate
bonds and mortgage backed securities held by banks or other
financial institutions. This in effect puts money back into the
financial institutions and allows them to make loans and conduct
normal business. The Federal Reserve Board used this policy in the
early nineties when the US economy experienced the Savings and Loan
crisis.

Quantitative easing

Quantitative easing is another
way to influence monetary policy, only recently begun to be used in
the United States. Other countries, such as Japan, have provided a
template for some Fed actions. Essentially, quantitative easing
provides a method for the central bank to provide funds at lower
than zero interest rates, in order to increase the monetary supply
and combat deflationary forces. This is accomplished by the Fed
purchasing U.S. government debt with newly printed U.S. currency.
In essence, the Fed is monetizing the debt. In the current (late
2007 to today) macro-economic environment, the slowing velocity of
money has induced U.S. central bankers to pursue a variety of new,
and to some radical, policies to produce economic stimulus.

Uncertainties

A few of the uncertainties involved in monetary policy decision
making are described by the federal reserve:

While these policy choices seem reasonably straightforward,
monetary policy makers routinely face certain notable
uncertainties. First, the actual position of the economy and growth
in aggregate demand at any time are only partially known, as key
information on spending, production, and prices becomes available
only with a lag. Therefore, policy makers must rely on estimates of
these economic variables when assessing the appropriate course of
policy, aware that they could act on the basis of misleading
information. Second, exactly how a given adjustment in the federal
funds rate will affect growth in aggregate demand—in terms of both
the overall magnitude and the timing of its impact—is never
certain. Economic models can provide rules of thumb for how the
economy will respond, but these rules of thumb are subject to
statistical error. Third, the growth in aggregate supply, often
called the growth in potential output, cannot be measured with
certainty.

In practice, as previously noted, monetary policy makers do not
have up-to-the-minute information on the state of the economy and
prices. Useful information is limited not only by lags in the
construction and availability of key data but also by later
revisions, which can alter the picture considerably. Therefore,
although monetary policy makers will eventually be able to offset
the effects that adverse demand shocks have on the economy, it will
be some time before the shock is fully recognized and—given the lag
between a policy action and the effect of the action on aggregate
demand—an even longer time before it is countered. Add to this the
uncertainty about how the economy will respond to an easing or
tightening of policy of a given magnitude, and it is not hard to
see how the economy and prices can depart from a desired path for a
period of time.

The statutory goals of maximum employment and stable prices are
easier to achieve if the public understands those goals and
believes that the Federal Reserve will take effective measures to
achieve them.

Although the goals of monetary policy are clearly spelled out
in law, the means to achieve those goals are not. Changes in the
FOMC’s target federal funds rate take some time to affect the
economy and prices, and it is often far from obvious whether a
selected level of the federal funds rate will achieve those
goals.

Measurement of economic variables

A lot of data is recorded and published by the Federal Reserve. A
few websites where data is published are at the Board of Governors
Economic Data and Research page, the Board of Governors statistical
releases and historical data page, and at the St. Louis Fed's FRED
(Federal Reserve Economic Data) page. The Federal Open Market
Committee (FOMC) examines many economic indicators prior to
determining monetary policy.

Net worth of households and nonprofit organizations

The net worth of households and nonprofit organizations in the
United States is published by the Federal Reserve in a report
titled, Flow of Funds. At the end of fiscal year 2008,
this value was $51.5 trillion.

Money supply

Components of US money supply
(currency, M1, M2, and M3) since 1959

most common measures are named M0 (narrowest), M1, M2, and M3. In
the United States they are defined by the Federal Reserve as
follows:

Measure

Definition

M0

The total of all physical currency,
plus accounts at the central bank that can be exchanged for
physical currency.

M1

M0 + those portions of M0 held as reserves or vault cash + the
amount in demand accounts ("checking"
or "current" accounts).

The Federal Reserve ceased publishing M3 statistics in March 2006,
explaining that it cost a lot to collect the data but did not
provide significantly useful information. The other three money
supply measures continue to be provided in detail.

Consumer price index

US consumer price index
1913–2006.

Year on year change in the US dollar
consumer price index 1914–2006.

The ability to maintain a low inflation rate is a long-term
measure of the Fed's success.

The data consists of the US city average of consumer prices and can
be found at The US Department of Labor—Bureau of Labor
Statistics

The CPI taken alone is not a complete measure of the value of
money. For example, the monetary value of stocks, real estate, and
other goods and services categorized as investment vehicles are not
reflected in the CPI. It is difficult to obtain a full picture of
value across the full range of the cost of living, so the CPI is
typically used as a substitute. The CPI therefore has powerful
political ramifications, and Administrations of both parties have
been tempted to change the basis for its calculation, progressively
underestimating the true rate of decline in purchasing power. A
controversial method used in calculating CPI is "hedonic
adjustments". The basic concept applies a discount for the assumed
increased utility of products (i.e. faster CPU processing speeds of
computers). However, consumers rarely make decisions based upon the
price per computer processing cycle. An argument can be made that
such hedonic adjustments significantly contribute to understating
true inflation experienced by consumers buying everyday goods and
services.

One of the Fed's main roles is to maintain price stability. This
means that the change in the consumer price index over time should
be as small as possible. The ability to maintain a low inflation
rate is a long-term measure of the Fed's success. Although the Fed
usually tries to keep the year-on-year change in CPI between 2 and
3 percent, there has been debate among policy makers as to whether
or not the Federal Reserve should have a specific inflation targeting policy.

Inflation and the economy

There are two types of inflation that are closely tied to each
other. Monetary inflation is an increase in the money supply. Price
inflation is a sustained increase in the general level of prices,
which is equivalent to a decline in the value or purchasing power
of money. If the supply of money and credit increases too rapidly
over many months (monetary inflation), the result will usually be
price inflation. Price inflation does not always increase in direct
proportion to monetary inflation; it is also affected by the
velocity of money and other factors. With price inflation, a dollar
buys less and less over time.

The effects of monetary and price inflation include:

Price inflation makes workers worse off if their incomes don’t
rise as rapidly as prices.

Pensioners living on a fixed income are worse off if their
savings do not increase more rapidly than prices.

Lenders lose because they will be repaid with dollars that
aren't worth as much.

Savers lose because the dollar they save today will not buy as
much when they are ready to spend it.

Businesses and people will find it harder to plan and therefore
may decrease investment in future projects.

Unemployment rate

United States unemployment rates
1950-2005

The unemployment rate statistics are collected by the Bureau of Labor Statistics. Since
one of the stated goals of monetary policy is maximum employment,
the unemployment rate is a sign of the success of the Federal
Reserve System.

Like the CPI, the unemployment rate is used as a barometer of the
nation's economic health, and thus as a measure of the success of
an administration's economic policies. Since 1980, both parties
have made progressive changes in the basis for calculating
unemployment, so that the numbers now quoted cannot be compared
directly to the corresponding rates from earlier administrations,
or to the rest of the world.

Budget

The Federal Reserve is self-funded. The vast majority (90%+) of Fed
revenues come from open market operations, specifically the
interest on the portfolio of Treasury securities as well as
“capital gains/losses” that may arise from the buying/selling of
the securities and their derivatives as part of Open Market
Operations. The balance of revenues come from sales of financial
services (check and electronic payment processing) and discount
window loans. The Board of Governors (Federal Reserve Board)
creates a budget report once per year for Congress. There are two
reports with budget information. The one that lists the complete
balance statements with income and expenses as well as the net
profit or loss is the large report simply titled, Annual
Report. It also includes data about employment throughout the
system. The other report, which explains in more detail the
expenses of the different aspects of the whole system, is called
Annual Report: Budget Review. These are comprehensive
reports with many details and can be found at the Board of
Governors' website under the section Reports to
Congress

Net worth

Balance sheet

One of the keys to understanding the Federal Reserve is the Federal
Reserve balance sheet (or balance
statement). In accordance with Section 11 of the Federal Reserve Act, the Board of Governors of the Federal Reserve
System publishes once each week the "Consolidated Statement of
Condition of All Federal Reserve Banks" showing the condition of
each Federal Reserve bank and a consolidated statement for all
Federal Reserve banks. The Board of Governors requires that excess
earnings of the Reserve Banks be transferred to the Treasury as
interest on Federal Reserve notes.

Below is the balance sheet as of April 22, 2009 (in
millions of dollars):

ASSETS:

Gold certificate account

11,037

Special drawing rights certificate acct.

2,200

Coin

1,870

Securities, repurchase agreements, term
auction credit, and other loans

The Fed holds at least $534 billion of the national debt. The "securities
held outright" value used to directly represent the Fed's share of
the national debt, but after the creation of new facilities in the
winter of 2007-2008, this number has been reduced and the
difference is shown with values from some of the new
facilities.

The more than $1 trillion in Federal Reserve Note liabilities
represents the total value of all dollar bills in existence; over
$176 billion is held by the Fed (not in circulation); and the "net"
figure of $863 billion represents the total face value of Federal
Reserve Notes in circulation.

The $916 billion in deposit liabilities of depository
institutions shows that dollar bills are not the only source of
government money. Banks can swap deposit liabilities of the Fed for
Federal Reserve Notes back and forth as needed to match demand from
customers, and the Fed can have the Bureau of Engraving and
Printing create the paper bills as needed to match demand from
banks for paper money. The amount of money printed has no relation
to the growth of the monetary base (M0).

The $93.5 billion in Treasury liabilities shows that the
Treasury Department does not use private banks but rather uses the
Fed directly (the lone exception to this rule is Treasury Tax and Loan because
government worries that pulling too much money out of the private
banking system during tax time could be disruptive).

The $9.7 billion in 'other liabilities and accrued dividends'
represents partly the amount of money owed so far in the year to
member banks for the 6% dividend on the 3% of their net capital
they are required to contribute in exchange for nonvoting stock
their regional Reserve Bank in order to become a member. Member
banks are also subscribed for an additional 3% of their net
capital, which can be called at the Federal Reserve's discretion.
All nationally chartered banks must be members of a Federal Reserve
Bank, and state-chartered banks have the choice to become members
or not.

Total capital represents the profit the Fed has earned, which
comes mostly from assets they purchase with the deposit and note
liabilities they create. Excess capital is then turned over to the
Treasury Department and Congress to be included into the Federal
Budget as "Miscellaneous Revenue".

In addition, the balance sheet also indicates which assets are held
as collateral against Federal
Reserve Notes.

Federal Reserve
Notes and collateral

Federal Reserve notes outstanding

1,048,136

Less: Notes held by F.R. Banks

185,176

Federal Reserve notes to be
collateralized

862,960

Collateral held against Federal Reserve notes

862,960

Gold certificate account

11,037

Special drawing rights certificate
account

2,200

U.S. Treasury, agency debt, and
mortgage-backed securities pledged

849,723

Other assets pledged

0

Criticisms

The Federal Reserve System has faced criticism throughout its
existence. Initially, opponents' primary concern was
that the system would favor the "eastern establishment," mostly
centering around New York
City.This applied an old criticism of central
banking to a new central bank: arguing against the creation of the
First Bank
of the United States, an early forerunner of the Fed, Thomas Jefferson thought that people in New
York City would use a central banking system to dominate the United
States.In the 1800s, Andrew Jackson shut down the Second Bank of
the United States for similar reasons, believing it was used to
funnel wealth to the northeast from the rest of the country.A similar
critique is repeated to this day, as people claim that the Federal
Reserve benefits "Wall
Street" but not "Main
Street."

Transparency has been another concern. Deals with foreign central
banks are not published in congressional reports, for instance, and
many assets and liabilities of the Federal Reserve Banks are not
published anywhere. Some accuse the Fed, along with other western
central banks, of suppressing the gold price by covertly lending
their massive gold holdings into the markets, without ever asking
the indebted banks to pay them back (This supposedly props up
confidence in the U.S. dollar). This has in turn led to accusations
against U.S. Army and Marine officials for not keeping a
close eye on the gold at Fort Knox.

Other criticism involves economic data compiled by the Fed. Some
allege that values reported are misleading, exaggerated or
altogether falsified to fulfill some type of political gain. The
Fed sponsors much of the monetary economics research in the US, and
Lawrence H.White objects that this makes it less
likely for researchers to publish findings challenging the status
quo. Other criticisms are contradictory: Some allege that the Fed
is unaccountable, while others allege that the Fed isn't
independent, following orders from the President of the United
States, other powerful politicians, or well-established think
tanks such as the Council
on Foreign Relations, Bilderberg
Group, CATO, PNAC, etc.
Adherents to the Austrian School of economic theory blame the
current economic crisis on the Federal Reserve's policy,
particularly the policy of the Fed under the leadership of Alan Greenspan, of credit expansion through
historically low interest rates starting in 2001, which they claim
enabled the United States
housing bubble.

References

Bibliography

Recent

Greider, William (1987).
Secrets of the Temple. Simon & Schuster. ISBN
0-671-67556-7; nontechnical book explaining the structures,
functions, and history of the Federal Reserve, focusing
specifically on the tenure of Paul
Volcker

Meltzer, Allan H. A History of the Federal Reserve, Volume
2: Book 2, 1969-1985 (2009) ISBN 9780226519944; In three
volumes published so far, Meltzer covers the first 70 years of the
Fed in considerable detail